MUFG: The USD - FJElite

The USD is on course to strengthen for a second consecutive week. The bullish breakout was triggered by the Fed's hawkish policy update, which alongside the sharp correction lower in energy prices, has reinforced expectations of monetary policy divergence. While the Fed is now seen as potentially hiking rates just as energy-driven inflation peaks, European central banks are becoming more cautious about further tightening. The ECB's annual policy forum in Sintra next week should provide additional insight into the policy outlook among European central banks and the Fed. A smaller and shorter-lived energy price shock would be a positive development for the global economy, particularly for Asia and Europe, whose economies have been more heavily affected. The potential for improving cyclical momentum outside of the US later this year, combined with the Fed remaining on hold, underpins our expectation that the USD's strength will not hold up beyond the near term. FJowever, if we are wrong and the Fed delivers multiple rate hikes to reinforce its inflation fighting credibility, then the USD could strengthen by a further 3-5%.